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CFPB Continues RESPA Enforcement With Action Against Nonbank Lender
On February 24, the CFPB announced that a nonbank mortgage lender agreed to pay an $83,000 penalty to resolve violations of RESPA’s Section 8. The lender primarily offers loss-mitigation refinance mortgage loans to distressed borrowers. According to the consent order, after the lender ceased obtaining funding for its loans from two subsidiaries of a hedge fund, the lender continued to split loss-mitigation and origination fees with the subsidiaries on 83 additional loans originated over an eight-month period, even though neither subsidiary provided financing or any other service in any of those transactions.
The lender self-reported the violation, admitted liability, and provided information related to the conduct of others, which the CFPB stated has facilitated other enforcement investigations. In addition, the consent order requires the lender make its “officers, employees, representatives, and agents” available for interviews and testimony, and to produce all non-privileged documents requested by the CFPB, “in connection with this action and any related judicial or administrative proceeding or investigation commenced by the Bureau or to which the Bureau is a party.” The company also cannot apply for a tax deduction or credit for the penalty, and cannot seek indemnification from any source. The CFPB indicated that the lender’s self-reporting and cooperation, which were consistent with the Bureau’s Responsible Business Conduct bulletin, played a part in mitigating the penalty.
This consent order is another public action the CFPB has taken under RESPA’s Section 8, although this action appears to be the first under Section 8(b) of RESPA, which prohibits fee-splitting and the payment and receipt of unearned fees. The CFPB has previously enforced Section 8(a), which prohibits referral fees and kickbacks, most recently in the case of a mortgage company that allegedly made inflated rental payments in exchange for mortgage referrals. The Bureau’s Section 8(b) action emphasizes the CFPB’s commitment to enforcing all of the aspects of Section 8, particularly against nonbank lenders.
CFPB Director Richard Cordray summed up the CFPB’s RESPA enforcement stance, stating: “These types of illegal payments can harm consumers by driving up the costs of mortgage settlements. The Bureau will use its enforcement authority to ensure that these types of practices are halted. We will, however, also continue to take into account the self-reporting and cooperation of companies in determining how to resolve such matters.”
FinCEN Director Discusses 2014 Priorities
On February 20, in remarks to the Florida International Bankers Association Anti-Money Laundering Conference, FinCEN Director Jennifer Shasky Calvery reviewed FinCEN’s key initiatives over the past year and outlined priorities going forward. She discussed FinCEN’s efforts with regard to virtual currency risks and stated that it is important for financial institutions that deal in virtual currency to put effective AML/CFT controls in place. She noted that it is also important for all stakeholders to keep virtual currency concerns in perspective given the relatively small size of the market. FinCEN is growing increasingly concerned with third party money launderers who layer transactions, create or use shell or shelf corporations, use political influence to facilitate financial activity, or engage in other schemes to infiltrate financial institutions and circumvent AML controls. FinCEN intends to pursue such actors regardless of where they are located. Director Shasky Calvery also reiterated concerns about securities firms that offer services similar to banks, and promised continued focus on threats posed by trade-based money laundering. With regard to its policy initiatives, FinCEN intends to engage stakeholders in a discussion of “balancing the policy motivations behind data privacy and secrecy laws in different jurisdictions with the need for an appropriate level of transparency to combat money laundering and terrorist financing.” The Director noted that this issue is particularly critical in the area of correspondent banking.
CFPB Deputy Director Promises Vigilant Supervision, Enforcement Of Mortgage Servicing Rules
On February 19, CFPB Deputy Director Steve Antonakes spoke at the Mortgage Bankers Association’s annual servicing conference and detailed the CFPB’s expectations for servicers as they implement the new servicing rules that took effect last month.
Mr. Antonakes’s remarks about the CFPB’s plans to supervise and enforce compliance with the new rules are the most assertive to date. Until now, the CFPB’s public position has been that “in the early months” after the rules took effect, the CFPB would not look for strict compliance, but rather would assess whether institutions have made “good faith efforts” to come into “substantial compliance.”
Mr. Antonakes clarified this position, stating that “[s]ervicers have had more than a year now to work on implementation” of “basic practices of customer service that should have been implemented long ago” and that “[a] good faith effort . . . does not mean servicers have the freedom to harm consumers.” He went on to state that “[m]ortgage servicing rule compliance is a significant priority for the Bureau. Accordingly, we will be vigilant about overseeing and enforcing these rules.”
Default Servicing and Foreclosures
Specifically, the CFPB expects that, “in these very early days,” servicers will (i) identify and correct “technical issues”; (ii) “conduct outreach to ensure that all consumers in default know their options”; and (iii) “assess loss mitigation applications with care, so that consumers who qualify under [a servicer’s] own standards get the loss mitigation that saves them – and the investor – from foreclosure.” Mr. Antonakes acknowledged that “foreclosures are an important part of the business, but they shouldn’t happen unless they’re necessary and they must be done according to relevant law. We expect the new rules to go a long way to reduce consumer harm for all consumers with mortgages, especially as these rules work in concert with the existing prohibition against unfair, deceptive, and abusive practices.”
Servicing Transfers
Mr. Antonakes specifically detailed expectations concerning mortgage servicing rights transfers. He stated that the CFPB expects servicers to “pay exceptionally close attention to servicing transfers and understand [that the CFPB] will as well. . . . Our rules mandate policies and procedures to transfer ‘all information and documents’ in order to ensure that the new servicer has accurate information about the consumer’s account. We’re going to hold you to that. Servicing transfers where the new servicers are not honoring existing permanent or trial loan modifications will not be tolerated. Struggling borrowers being told to pay incorrect higher amounts because of the failure to honor an in-process loan modification – and then being punished with foreclosure for their inability to pay the incorrect amounts – will not be tolerated. There will be no more shell games where the first servicer says the transfer ended all of its responsibility to consumers and the second servicer says it got a data dump missing critical documents.”
Democratic Lawmakers Urge Federal Reserve Board To Increase Direct Role In Supervision And Enforcement
On February 11, Senator Elizabeth Warren (D-MA) and Representative Elijah Cummings (D-MD) sent a letter to newly appointed Federal Reserve Board Chairman Janet Yellen, asking that she reconsider the Board’s policy of delegating supervisory and enforcement powers to staff. The lawmakers cite a recent letter from former Federal Reserve Chairman Ben Bernanke, in which he explained that in the last 10 years, the Board of Governors voted on only 11 of nearly 1,000 enforcement actions, and that under current application of the Federal Reserve’s enforcement delegation policy, the Federal Reserve can enter into consent orders without ever receiving formal approval of senior staff. The letter asks for a change in policy that would require the Board to retain greater authority over the Federal Reserve’s enforcement and supervisory activities. Specifically, the lawmakers recommend that (i) the Board vote on any consent order that involves $1 million or more or that requires a bank officer to be removed and/or new management installed; (ii) staff formally notify the Board before entering into a consent order under delegated authority; (iii) each Board member be provided with the necessary staffing capacity to review and analyze pending enforcement actions; and (iv) all Board members receive a copy of all letters sent to the Chairman or another Board member by a committee or member of Congress.
Financial Reform Group Files Suit Challenging Largest DOJ RMBS Settlement
On February 10, Better Markets, a public interest non-profit organization, announced the filing of a lawsuit in the U.S. District Court for the District of Columbia challenging a November 2012 settlement obtained by the DOJ and several state attorneys general, which resolved allegations that a large bank and certain institutions it acquired misled investors in connection with the packaging, marketing, sale, and issuance of certain RMBS. The suit claims, in short, that by resolving the allegations through a civil settlement without seeking any judicial review and approval, the DOJ violated the Constitution’s separation of powers doctrine. In addition, the suit claims, the DOJ’s failure to commence a civil action (i) violated the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, and (ii) constituted an arbitrary and capricious action in violation of the Administrative Procedures Act. The complaint asks the court to declare the agreement unlawful and invalid and to issue an injunction that would prevent the DOJ from enforcing the agreement until the agreement is reviewed and approved by a court.
FTC Announces Settlement Over Alleged Violations Of International Safe Harbor Privacy Framework
On February 11, the FTC announced a settlement to resolve allegations that a children’s online entertainment company falsely claimed it was abiding by the U.S.-EU Safe Harbor international privacy framework. The FTC alleged that the company deceptively claimed through statements in its privacy policy that it held current certifications under the Safe Harbor Framework even though it had allowed its certification to lapse. The FTC did not allege that the company committed any substantive violations of the privacy principles of the Safe Harbor framework or other privacy laws. The proposed settlement agreement, which is subject to public comment, would prohibit the company from misrepresenting the extent to which it participates in any privacy or data security program sponsored by the government or any other self-regulatory or standard-setting organization. The action follows a dozen similar actions recently announced by the FTC.
FINRA Announces Its Largest AML Fine, Suspends Securities Firm's Former Compliance Officer
On February 5, FINRA announced its largest ever fine for alleged AML-related violations. The self-regulatory agency ordered a securities firm to pay $8 million for allegedly failing to (i) implement an adequate AML program to monitor and detect suspicious penny stock transactions; (ii) sufficiently investigate potentially suspicious penny stock activity brought to the firm's attention; and (iii) fulfill its SAR filing requirements. Further, the firm allegedly did not have an adequate supervisory system in place to prevent the distribution of unregistered securities. In addition to the monetary penalty against the firm, FINRA suspended the firm’s former Global AML Compliance Officer for one month and fined him $25,000. FINRA explained that penny stock transactions pose heightened risks because low-priced securities may be manipulated by fraudsters. In this case, it believes that, over a four-and-a-half year period, the firm executed transactions or delivered securities involving at least six billion shares of penny stocks, “many on behalf of undisclosed customers of foreign banks in known bank secrecy havens.” The firm allegedly executed these transactions despite the fact that it was unable to obtain information essential to verify that the stocks were free trading and in many instances did so without even basic information such as the identity of the stock's beneficial owner, the circumstances under which the stock was obtained, and the seller's relationship to the issuer. During this time, penny stock transactions generated at least $850 million in proceeds for the firm’s customers. The firm did not admit to or deny the allegations.
Congressional Committees Review Data Breaches, Potential Federal Responses
This week, several congressional committees held hearings to review recent data security breaches and related consumer privacy issues, particularly those related to consumer financial data and payment systems. Generally, the hearings covered (i) potential enhancements to federal enforcement capabilities, (ii) card and payment system technologies and potential data security standards, and (iii) consumer protection enhancements. The hearings included two by the Senate Banking Committee—the first by a Subcommittee and a second held by the full Committee—as well as hearings held by the Senate Judiciary Committee and a Subcommittee of the House Energy and Commerce Committee. With regard to federal enforcement capabilities, the FTC reiterated its support for federal legislation that establishes a national breach notification requirement and a federal data security standard the FTC can enforce with civil penalties. The FTC also would like (i) its jurisdiction for data security enforcement to include nonprofit organizations, and (ii) APA rulemaking authority to address evolving risks. In support of the FTC’s request for additional authority, several members highlighted their view of the FTC’s limited ability to enforce data security under section 5 of the FTC Act. In particular, Senator Elizabeth Warren (D-MA) asserted that the FTC Act’s demanding standard and lack of strict liability unnecessarily limits the FTC’s authority to protect the public in data security matters. The FTC believes federal legislation should not preempt stronger state laws, and that state attorneys general should have concurrent enforcement authority. Significant debate centered on the possible benefits of implementing “Chip and PIN” technology in payment cards, with several legislators questioning why such technology is in widespread use in other major economies but has not yet been deployed in the U.S. Witnesses representing retailers repeatedly called on banks and payment network companies to move immediately to that technology, claiming that the outdated cards still being issued in the U.S. create unnecessary security risk. Banks outlined their plans to move to chip-based cards by October 2015 and stressed the role retailers must play in helping secure consumer data. As a corollary to technological solutions, committee members debated the role of government in setting data security standards, including for payments. Several members of Congress were critical of non-governmental standards bodies and called for a technologically neutral federal standard. Finally, Senator Mark Warner (D-VA) expressed an interest in amending federal law to extend zero-liability protections currently applicable to credit card transactions to debit card transactions.
DOJ Obtains Settlement In FHA False Claims Act Case
On February 4, the DOJ announced the filing and simultaneous settlement of a complaint by the U.S. Attorney for the Southern District of New York (SDNY) against a mortgage lender alleged to have violated the False Claims Act (FCA) by submitting false loan-level certifications to HUD that fraudulently induced HUD to insure ineligible mortgage loans. The complaint makes similar claims with respect to loans insured by the Department of Veterans Affairs (VA). This is the first FCA case brought by the SDNY to assert claims based on VA loans. Although the complaint was filed in a whistleblower qui tam case under seal in January 2013, it indicates the U.S. Attorney’s investigation of fraudulent lending practices has been on-going since 2011. In addition to allegations concerning reckless origination practices, the complaint also alleges that the lender’s underwriters manipulated the data entered into the AUS/TOTAL Scorecard system, repeatedly entering hypothetical data that lacked a factual basis with the goal of determining the lowest values that would generate an “accept/approve” recommendation. The U.S. Attorney claims this practice violated HUD guidance and encouraged fraud by both loan officers and borrowers, and also that the lender made false statements in its loan-level certifications when it falsely certified to the “integrity” of the data entered by underwriters into AUS/TOTAL. To resolve the matter, the lender agreed to pay a total of $614 million; $564.6 million to resolve the HUD claims and $49.4 million to resolve the VA claims. Consistent with the SDNY’s recent practice of requiring admissions in civil fraud cases, the settlement stipulation recites that the lender admits responsibility for certain specified allegations. The settlement also requires the lender to implement “an enhanced quality control program,” the terms of which are to be memorialized in a separate agreement still to be negotiated.
SDNY Rejects SEC's Proposed Alternative Service For Two Chinese Nationals
On January 30, the U.S. District Court for the Southern District of New York denied the SEC’s motion for an order authorizing alternative means of service for two Chinese nationals residing in the People’s Republic of China. SEC v. China Intelligent Lighting & Electronics, Inc., No. 13 CIV. 5079, 2014 WL 338817 (S.D.N.Y. Jan. 30, 2014). The SEC moved for the order after it was unable to serve two individual defendants in a securities fraud case by means of the Hague Convention on the Service Abroad of Judicial and Extra-Judicial Documents in Civil and Commercial Matters. The court agreed that alternative service would be appropriate, but rejected the SEC’s proposed method of alternative service: publication in the International New York Times and via email. The court held that alternative service is acceptable if it (i) is not prohibited by international agreement, and (ii) if it comports with constitutional notions of due process. Although no international agreement would prevent the SEC’s proposed methods of service, the court held the SEC failed to demonstrate such service was “reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.” The court held that the SEC failed to provide evidence that either method of service would actually reach the defendants—it did not provide any information about the distribution of the newspaper and failed to provide evidence the email addresses were accurate and in use by the defendants. The court denied the SEC’s motion without prejudice.